Debt by design

For huge numbers of households, debt is the price of getting through an ordinary month in an economy that is unequal and full of shocks. The last half decade has been a financial nightmare for people across the country, yet it disproportionately affects those already at a disadvantage. The UK’s racial wealth gap has deep historical roots, shaped by slavery, colonialism, and longstanding discrimination in housing and the jobs market that has restricted wealth-building for people of colour across generations.

Lower wealth and earnings for ethnic minority communities vigorously persist and serve to further entrench existing inequalities, pushing many minority households into unrelenting debt cycles. Any serious attempt to reduce debt must look beyond individual behaviour and towards the jobs market, the conditions that determine who can access benefits, and the cost and security of housing. We gathered masses of data together to set out how the design of our economy pushes minoritised communities into debt in Drivers of Debt, a report from Power to Prosper. This is what we found.

Minoritised workers already earn less across the board. In 2022, median Black British, African, and Caribbean employees were paid £1 less an hour compared with their White counterparts. Bangladeshi and Pakistani workers fared even worse, being paid £4 less. Stretched across a lifelong career in full-time work, this can result in tens if not hundreds of thousands in lost income, controlling and restricting everyday decisions, from replacing a broken boiler to taking a job risk that might pay off.

The social security system, which ought to be a backstop when wages do not cover need, often functions as an accelerant. Minoritised households are more likely to be on low incomes and are therefore more likely to rely on income-related benefits. This interacts brutally with a system designed around conditionality. Department for Work and Pensions (DWP) data shows that minoritised claimants are up to 50% more likely to be subject to conditions that expose them to sanctions compared to White claimants. If you are placed under conditions which heightens your exposure to sanctions, then a missed appointment, a mistaken form or an administrative screw-up can snowball into a large and sudden loss of income.

If income is the first line of defence against financial blows, wealth and assets are the shock absorbers. This is a problem, as of 2018,median net household wealth for Black African families (£34,300 in 2018) was nine times lower than for White households (£314,000 in 2018). Pakistani and Bangladeshi households have, on average, over £200,000 less than their White British counterparts. Households from minoritised groups are also far more likely to have negligible or no savings. A ​“sufficient” buffer is often described as two months of income in accessible savings — but our analysis shows that while approximately 60% of White households have such a buffer, only around 25% of minoritised households meet this same requirement. Without sufficient savings, minor disruptions quickly push you into debt, which is rarely cheap when you are already on the margins of financial security.

Whilst many minoritised households earn and save less, they also have fewer assets and higher spending commitments. Home-ownership rates remain starkly unequal, with under a quarter of Black households owning their home, compared with nearly 70% of White British households. That gap pushes far more minoritised households into the private-rented sector, where insecurity is built in and rents have risen faster than wages for years. It also means missing out on the main asset that most UK households ever get to own.

Poverty is the backdrop of much of this inequity. Bangladeshi, Pakistani, and Black people are far more likely to live in poverty than White British people, with over half of minoritised households growing up below the relative poverty line. This leaves minority households open to the ​“poverty premium”, the extra charge applied to people with the least. This can mean paying more for energy on a prepayment meter, paying more for credit because you are deemed a risky borrower, paying more for basic goods because you cannot buy in bulk, paying more for insurance, or paying more in time and hassle simply to access what others take for granted. The poverty premium drains what little capacity households have to build resilience.

If a chunk of the workforce is routinely paid less, spends more, and saves little, where does the missing money come from when the cost of living doesn’t politely shrink to match? For many, the only answer is loans and debt. In London, 28% of Black African and 24% of Black Caribbean residents are classified as ​“over-indebted” – meaning they have high unsecured debt-to-income ratios or bill arrears for essential utilities like heating or water, compared to only 8% of White British residents. Minoritised households were are twice as likely to have faced debt-collection activity like a visit from the bailiffs.

Ethnic minoritised households are also more likely to be juggling multiple forms of debt at once, including rent and council tax arrears, overdrafts, credit cards, buy-now-pay-later products, and informal borrowing from family and friends. They are disproportionately represented among those using high-cost or short-term credit, as limited savings and insecure incomes leave few alternatives when costs spike or income falls. Indeed, 34% of minoritised households have reported borrowing money just to cover day-to-day essentials like food and utilities, compared to 25% of White households. Debt, in this sense, is less a financial strategy than a stopgap for essential spending on housing, energy, and food.

If we want to reduce debt, we must treat it as a predictable outcome of how the economy is arranged. Policy solutions must aim to raise incomes and strengthen job market power, stop social security functioning as a punishment regime, and make housing less extractive and more secure. It also needs to bolster local wealth, building assets and savings, within communities who have been structurally and historically denied them.

These arguments, and the data underpinning them, are set out in Power to Prosper’s Drivers of Debt research. Power to Prosper is a partnership between the Runnymede Trust and the New Economics Foundation, working over multiple years to address the root causes of poverty, inequality, and problem debt, and to shift power so communities most harmed by the current system can shape what replaces it.

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